Do You Get a 1099 for Life Insurance Proceeds?

The answer to “Do you get a 1099 for life insurance proceeds?” is, in most cases, no. Generally, life insurance proceeds are paid out as death benefits. And in that case, it won’t be taxable, and you won’t get a 1099 form. But this is different when the insurance proceeds contain interest income or certain other amounts. 

It is worth knowing when life insurance is taxable to help beneficiaries report any taxable income properly to the IRS. To ensure your tax documents are always in order, you can make a pay stub online. 

Whenever a loved one dies, the last thing both you and your family need to worry about is taxes. This article answers “Do you get a 1099 for life insurance proceeds?” So, you know when you will get tax forms and any life insurance benefits you are entitled to.

What Is the Relationship Between Life Insurance Proceeds and Taxes?

Life insurance is something that gives security to your loved ones. After the death of the insured person, the insurance company pays out a sum of money to the named beneficiary. They call this sum death benefits. When the beneficiaries get this money, it can help them to cover expenses and also replace the lost income. Some use the funds for funeral costs or even medical expenses.

So, do you get a 1099 for life insurance proceeds? Here’s some good news. Generally, these payments are not includable in gross income. This implies that if you’re a beneficiary, you don’t have to pay taxes on such payments. This exclusion is to help those families who have just lost their loved ones. And it applies to most cases where the proceeds are paid directly. 

However, there are some exceptions depending on what the life insurance policy looks like. If it earns interest before the payout, some portions may then become taxable. These exceptions are limited, but they are still important.

Read More: What Is Medical ER on Paystub? And How It Works

Are Life Insurance Policy Death Benefits Tax-Free?

Usually, any death benefits you get from a life insurance contract will be tax-free. When the insured person, the insurance company gives the money or payout to the beneficiary. And it’s generally not treated as income for tax purposes.

When you also check the IRS form, you can see that it confirms this exclusion. They treat these proceeds differently because that money sort of stands in for the financial contribution of the person who died. 

Check Out: Create pay stubs to reconcile with your annual tax forms

When Do You Get a 1099 for Life Insurance Proceeds?

Now, let’s talk about “When do you get a 1099 for life insurance proceeds?” Even if the death benefit itself is not taxable, a portion of it may be seen as taxable income by the IRS. And if that’s the case, you may get a 1099 form.

1099-INT for Interest Income on Life Insurance Premiums

The most common reason why you may get a 1099-INT is if there was any interest earned on the money. In some cases, it may take some time for you to get the payout after the death of the insured. So, when there’s a delay, the insurance company may pay you some interest. That part of the money is taxable, and that taxable interest is different from the benefit.

For example, let’s say the actual amount you are supposed to get is $200,000, but they pay you $201,500. That extra $1,500 is interest income. For that interest portion, you’ll now get a 1099-INT form from the insurance company. You must report that extra money as interest income. But that’s when it goes over a certain threshold. Right now, it’s when the interest is more than $10, the IRS says that filing this form is compulsory.

The insurance company must also report any interest that goes above that amount. They should send you the 1099-INT form by January 31. It will show you the total amount of taxable interest. This should be kept by the policyholders for filing.

When You Get Other Types of Tax Forms

Do you get a 1099 for life insurance proceeds? In some cases, you get other tax forms instead of a 1099-INT. For example, if your insurance proceeds come in the form of an annuity, you will receive a 1099-R form recording distributions. 

Small businesses usually have life insurance policies on key employees. In some cases, they surrender the policies or get dividends from mutual insurance companies. When this happens, they get tax forms so they can report any taxable gains. 

Some policyholders could also get rebates or dividends from mutual insurance companies. When this happens, they may need to fill out other tax forms. Also, if you have a settlement or accident policy, there are different rules. And you’ll get separate forms for filing. 

Also Read: How To Calculate Provision for Income Taxes

Do You Get a 1099 for Life Insurance Proceeds? When They Become Taxable

There are some other situations that answer “Do you get a 1099 for life insurance proceeds?” Even if death benefits are generally tax-free, some things can make everything or a part of it taxable.

1. Cash Value Withdrawals

Some life insurance policies build cash value over time, and you can withdraw at some point. If the money you took out is more than you paid in premiums, the excess is taxable income.

For example, let’s say what you paid in life insurance premiums is $50,000. Now, the cash value has grown to $75,000. If you withdraw all of that, the $25,000 gain on top of it is taxable. Also, if you borrow against the cash value, that’s a policy loan. It’s generally not taxable unless the policy lapses.

Whenever you surrender a policy, the taxable portion is the total received minus the premiums you paid. The insurance company sends you a 1099-R form showing the taxable amount.

2. Employer-Provided Life Insurance

You may have an employer that provides life insurance for employees. If your employer pays for coverage that’s over a certain threshold, what’s left is called additional premiums. That money is taxable income, and it shows up on your W-2 form.

3. Transfer of Life Insurance Contract for Valuable Consideration

Another situation to look at is the transfer-for-value rule. Let’s say you buy a life insurance policy for cash or other valuable consideration. The death benefits might be limited to the amount you paid plus any additional premiums. This deters investment schemes in a way. So, customers need to understand the rules before purchasing policies from others.

For example, let’s say you buy a $500,000 life insurance contract at a cost of $100,000. After that, you now pay $20,000 in premiums. In that case, only $120,000 is tax-free. What is left, which is $380,000, is taxable income.

Further Reading: OASDI Meaning: What Is OASDI Tax on Paycheck?

How To Report Taxable Life Insurance Income Tax

Now you know “When do you get a 1099 for life insurance proceeds?” When you do get taxable amounts as part of your life insurance proceeds, you need to report them correctly. This helps you avoid any issues with the IRS.

Firstly, you’ll get a 1099-INT form that shows you any interest income you get. Report it on Schedule B of Form 1040. If what you get is a 1099-R form for annuity distributions, report it on line 5 of Form 1040.

Lastly, keep all your paperwork. Any policy documents, 1099 forms, and other statements you get from your insurance company. If you need any more filing guidance, you can check the IRS page for life insurance taxation. 

Check Out: Start creating your stubs with our free paystub templates today

Final Thoughts

So, do you get a 1099 for life insurance proceeds? Only if any part of your payout counts as taxable interest. Once you know how these rules work, you can plan ahead and file your taxes properly. They are in place to help a policyholder or beneficiary after an accident or natural death.

Whenever it comes to taxes, you need to have all the right documents. And that’s why our paystub generator helps you generate professional pay stubs with all the information you need. Once you have the right documents and the right information, you’ll be ready to handle taxes.